The Pros and Cons of Buying a Franchise

Buying a franchise is one of the best ways to start and run a successful business. The most visible examples of thriving franchises are in the fast food industry (Burger King, KFC, etc.), but there are numerous strong franchise businesses in almost every other market space, from plumbing to child care to management consulting. The initial investment varies as well, from tens of thousands of dollars for some personal services businesses to millions for national restaurant and hotel brands. While each franchise is a unique opportunity, before you buy a franchise consider these general pros and cons.

Some of the pros include:

Established Brand Identity: Many franchises have built a strong, positive brand identity among their prospective customers. In many cases, the public isn’t even aware that franchisees are an important part of the brand’s go-to-market strategy. Some good examples of this are GNC Live Well, Choice Hotels, ServPro, Midas, H&R Block, and Merry Maids. Your chances of success are significantly increased if the franchise you buy has wide brand awareness.

A Proven Business Model: A good franchise provides a proven business model. One example of a unique, successful business model: Snap-on Tools. Its franchisees sell high-end tools from mobile stores. To check up on how well a particular franchise works, talk to existing owners about their own experiences.

Operational Support: Strong franchises provide their investors with training, procedures, software, approved suppliers and even building plans. Creating this yourself could take years. When looking at more than one franchise opportunity, compare the level of support each franchisor provides its franchisees.

Future Products and Promotion: The best franchisors have a long term plan for new products and promotion that will drive franchisee growth. Look closely at franchisors with a track record of new product introductions and innovative marketing.

What are some of the downsides of purchasing a franchise?

High Initial Cost: You get what you pay for, and franchisors place a high value on the brands they’ve developed and the support package that they provide. You’ll may also have to invest in equipment and related start-up expenses. Make sure you understand all of the costs, and talk to other franchisees to get their take on the start-up process.

Ongoing Royalty Payments: Once you’re underway, part of your cost of business is ongoing royalty and advertising payments back to the franchisor. These come off the top, and depending on the franchise can range from near zero to over 10% of gross sales. Royalties and fees help your franchisor support your brand and provide operations support, and you’ll need to judge if they’re a good deal for you.

Limited Control: Owning a franchise means giving up control normally accorded a business owner. Your advertisements may have to follow strict guidelines, you won’t be able to sell non-approved products, your selling area may be limited and you may not be able to use non-approved suppliers. Get comfortable with the franchisor’s rules before making a buy decision.

Long Term Viability: A franchise brand that was a fantastic investment five years ago may not be such a great business today. One of the biggest challenges faced by franchisors is keeping their brand fresh and their business model and support up to date. (All franchises must address this. A case in point is McDonalds’ recent struggles to tailor its menu to shifting tastes.) The best franchises are the ones with demonstrated staying power.

Due diligence is the foundation of every good investment decision. If you’re looking at a franchise opportunity, kick the tires. Visit multiple franchisee locations. Talk to owners. Look at the support package they’re receiving. Review the franchise’s history of new product introductions and improved business and advertising support. Check out the competition. (Visit the competition!) You’ll learn a lot, and in the process make the right decision.